A company decides to invest 5% of its present profits into the stock market each year. The company profits continue to increase by 12.5% annually and after 5 years the board decides to change its investment to 5% of the present profits. If the annual return on the investment is 16% compound interest, calculate the total value of the investment after 10 years if in the initial year the company's profit were £500,000.
Help - the text book says the answer is £147,130.64 but I cannot get this??
Let's see...
500,000*0.05 = 25,000
With no increase in profits and no earnings on the investment, this leads to 250,000 after 10 years. How can it lead to less than 150,000 after 10 years when neither increased profits nor interest are included?
Add the increased profits: We've exceeded 150,000 by year 5.
Add investment earnings: We're right up against 150,000 by year 4.
I think we must conclude that the answer is very bad or the problem statement is very bad. Based on the evidence below, my first impression is the problem statement.
1) "invest 5% of its present profits"
2) "change its investment to 5% of the present profits"
That doesn't look like a "change" to me. Something fishy here.
Show your work and perhaps we can get a clue what it wants.
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